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President Obama's nearly $4 trillion budget for fiscal 2016 would eliminate tax credits for the oil and gas industry and force master limited partnerships (MLP) formed by fossil fuel entities to be taxed at a higher rate, while making major investments to combat climate change on several fronts.

But the proposed $3.99 trillion budget unveiled Monday also provides some benefits to the industry, in the form of tax credits for manufacturers of natural gas vehicles (NGV) and lower taxes on liquefied natural gas (LNG).

What Was Proposed

In a 312-page document, the Department of the Treasury said the Obama administration's proposed budget includes a new refundable investment tax credit of $2 billion for new and retrofitted electric generating units. The new plants would be required to capture more than 75% of their carbon dioxide (CO2) emissions, and retrofits would be required to apply for existing plant units that have capacities greater than 250 MW, and that can capture and store more than 1 million metric tons (mt) of CO2 per year.

Current law provides a CO2 sequestration credit of $20/mt that is captured at a qualified facility and disposed into secure geological storage. A credit of $10/mt if provided for CO2 injected for enhanced oil and gas recovery operations. Both would be extended under the proposal -- the former at a rate of $50/mt -- and would be allowed for a maximum of 20 years of production.

"CO2 sequestration will reduce greenhouse gas emissions [GHG] from fossil fuel combustion," Treasury said. "The current sequestration credit does not provide incentives for CO2 sequestration beyond the current phase-out quantity. Investments in CO2 capture and sequestration technologies will help facilitate additional technological improvements that will be important for reducing the costs of controlling future GHG emissions."

But the thorniest issue by far would be the elimination of what Treasury called "fossil fuel tax preferences," among other things. Specifically, the budget calls for repealing the enhanced oil recovery (EOR) credit, the credit for oil and gas produced from marginal wells, and the expensing of intangible drilling costs. MLPs formed by fossil fuel entities would be taxed as C corporations, effective after Dec. 31, 2020.

Treasury said eliminating the tax preferences would meet a promise the president made at the G20 summit in Pittsburgh in 2009 (see Daily GPI, Sept. 28, 2009; Sept. 24, 2009).

"The oil, gas, and coal tax preferences the administration proposes to repeal distort markets by encouraging more investment in the fossil fuel sector than would occur under a neutral system," Treasury said. "This market distortion is detrimental to long-term energy security and is also inconsistent with the administration's policy of supporting a clean energy economy, reducing our reliance on oil, and reducing greenhouse gas emissions. Moreover, the subsidies for oil, natural gas, and coal must ultimately be financed with taxes that cause further economic distortions including underinvestment in other, potentially more productive, areas of the economy."

Industry, GOP Reaction

That explanation didn't sit well with Barry Russell, CEO of the Independent Petroleum Association of America (IPAA).

"At a time when our oil and natural gas production industry is experiencing significant uncertainty, the president's call for higher taxes on the industry would increase costs on our energy companies and ultimately the savings that are passed on to hardworking American families," Russell said Monday. "The president's call to repeal the industry's 'subsidies' mischaracterizes the industry's tax provisions and disregards the way the tax code has influenced energy development for decades.

"These are the same deductions provided to a wide array of other industries from manufacturing to accounting. These historic provisions enable independent producers to take on the high capital risk of exploring for and producing America's oil and natural gas. Without these deductions, like intangible drilling costs and percentage depletion, the American energy revolution the president continues to tout would not exist as it currently does."

Jack Gerard, CEO of the American Petroleum Institute, concurred.

"Opposition to President Obama's proposals is strong and bipartisan," Gerard said. "The president's annual call to raise taxes on U.S. oil and natural gas development would hurt job creation, infrastructure investment, the federal deficit, seniors on fixed incomes and domestic manufacturing."

With Republicans in control of both houses of Congress, it's unlikely that the president's proposed budget will closely resemble the final version ultimately passed by lawmakers. In a statement Monday, Sen. Jim Inhofe (R-OK), the new chairman of the Senate Environment and Public Works Committee, said Obama's budget was loaded with "pet projects" and unfairly targeted the oil and gas industry.

"The proposed budget would repeal the expensing of intangible drilling costs, percentage depletion, and the Section 199 manufacturers deduction," Inhofe said. "Each of these provisions lowers the cost of drilling and enables companies to continue growing their businesses. Further, the president proposes repealing the MLP organizational structure, which would dramatically increase the cost of raising capital for Oklahoma’s energy industry and, in turn, would stifle job creation.

"Between the president's unwillingness to complete the Keystone pipeline, the federal land grab in Alaska, and now his targeting of these provisions, it is clear the president does not support energy independence as an affordable, near-term goal," (see Shale Daily, Jan. 26; Jan. 6).

Proposed Allocations

The proposed budget calls for allocating $13.2 billion to the Department of Interior (DOI), a 7.71% increase over the $12.25 billion the department had enacted for net budget authority in 2015. The latest budget includes several appropriations for various DOI offices, including:

$1.2 billion to the U.S. Geological Survey (USGS), an increase of $149.8 million;

$1.2 billion to the Bureau of Land Management (BLM), an increase of $107.6 million;

$204.7 to the Bureau of Safety and Environmental Enforcement (BSEE), an increase of $46,000; and

$170.9 million to the Bureau of Ocean Energy Management (BOEM), an increase of $1.1 million.

"The budget provides support for onshore energy permitting and oversight on federal lands, with the BLM's oil and gas program realizing a 20% increase in mandatory and current funding compared to the 2015 enacted level," DOI said. "Coupled with implementation of a new automated permitting system that eliminates paper applications, these budget resources will facilitate improved responsiveness to permit requests while strengthening onshore inspection capabilities.

"The BLM's costs will be partially offset through new inspection fees totaling $48.0 million in 2016, requiring the onshore industry to share a greater part of the cost of managing the program from which it benefits, just as the offshore industry currently does."

The Department of Energy (DOE) would also see increased funding from the proposed budget. The department would receive $29.9 billion, a $2.5 billion (9.1%) increase from the enacted level for 2015. The total includes $842 million earmarked for fossil energy, which includes $560 million for research and development "to advance carbon capture and storage and natural gas technologies," DOE said.

Obama also suggested appropriating $8.6 billion to the U.S. Environmental Protection Agency (EPA), a $452 million (4.8%) increase over the $8.2 billion enacted in 2015. The agency said it plans to spend $1.1 billion on the goal of "addressing climate change and improving air quality."

Specifically, EPA said it plans to spend $214 million "to support regulatory activities and partnership programs to reduce GHG [greenhouse gas] emissions domestically and internationally." That includes "working with states to implement the Clean Power Plan [CPP] carbon dioxide emission standards for existing power plants, including direct technical assistance and funding to support development of state plans."

EPA added that the Obama administration has proposed creating a $4 billion Clean Power State Incentive Fund (CPSIF) for states that elect to exceed the CPP's minimum requirements for carbon pollution in the power generation sector.

"[CPSIF] will enable states that accelerate their reductions and go beyond the CPP to receive funds for, but not limited to, efforts that advance carbon pollution reductions," EPA said. "Efforts may include providing assistance to businesses to expand energy efficiency, renewable energy, and combined heat and power through, for example, low-interest loans and infrastructure investments. Efforts could also include mitigation or adaptation support to address environmental pollution in low income and underserved communities."

Last month, the EPA's Office of Air and Radiation said it would postpone issuing the final version of the CPP until mid-summer (see Daily GPI, Jan. 7).

Some Industry Benefits

Under the proposed budget, there would be a new tax credit for medium- and heavy-duty alternative fuel commercial vehicles, and the excise tax on LNG would be reduced, bringing it into parity with diesel.

According to Treasury, a tax credit of $25,000 would be available for dedicated alternative-fuel vehicles weighing 14,000-26,000 pounds, increasing to $40,000 for vehicles that weigh more. The credit would be applicable for vehicles placed into service after Dec. 31, 2015, and before Jan. 1, 2022. The credit amount would be reduced by 50% for vehicles placed into service in 2021.

"The credit would be available to the manufacturer of the vehicle, but the manufacturer would have the option to transfer the credit to a dealer that sells the vehicle or to the vehicle's end-use purchaser," Treasury said. "If the credit is transferred to an end-use business purchaser, the purchaser would not be required to reduce the basis of depreciable property by the amount of the credit.

Treasury said the proposed budget calls for reducing the current 24.3 cents/gallon excise tax on LNG to 14.1 cents/gallon, beginning after Dec. 31, 2015. The NGV industry has long championed a reduction in the excise tax on LNG (see Daily GPI, Jan. 16; Dec. 5, 2014).

"We're generally pleased to see what the president included," Matthew Godlewski, president of NGVAmerica, told NGI on Tuesday. "[With] the tax credits, the devil is in the details, but the credits to deploy more medium- and heavy-duty trucks really would help the industry quite a bit and it would definitely be a measure that would get more vehicles running on natural gas on the road...There's lot of positive news in the budget."

Asked if he thought the parts of the budget that NGVAmerica likes would ultimately pass Congress, Godlewski said lawmakers have been working on several of the issues, especially the disparity between LNG and diesel, for quite some time.

"It's good to see the leadership aligned on that goal, and that's certainly something that's been one of our priorities for a long time," Godlewski said. "With these other things, it's harder to say. We're certainly going to be talking to our allies up on the Hill over the coming weeks to see what else is possible."

Associate Editor | Dulles, VACharlie Passut joined the staff of NGI in February 2011. Before this he was a reporter for the Tidewater News and a copy editor for the Manassas Journal Messenger. He also served as systems administrator and web editor for the Oakland Press, and traveled extensively as a software installer/trainer for Baseview Products. He graduated from Northern Illinois University with a bachelor's degree in political science in 1992.
charlie.passut@naturalgasintel.com

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